LONDON: German Bund futures hit a new record high on Monday as data fuelled concerns over the region's growth prospects while risks surrounding Greece's huge debt restructuring also underpinned demand for safe-haven debt.
Italian and Spanish government bonds came under pressure as services activity data in the euro zone led to further profit-taking in assets which many in the market had said were looking expensive. Peripheral bonds rallied after the European Central Bank injected a second round of three-year funding into the financial system last week.
A survey showed Italian and Spanish businesses dragged the euro zone's private sector back into decline last month. . There are growing worries that the region's austerity drive aimed at reducing its debt burden could choke growth it desperately needs to get back on its feet.
"PMI's were a bit on the disappointing side," a trader said. "It's enough, when we are at contract highs, to push us through (as) people try to trigger stops," he said.
In a volatile session German Bund futures opened lower then hit a high of 140.39, before succumbing to profit-taking It was last down two ticks on the day at 140.04.
Commerzbank strategist Rainer Gunterman said there was scope for the Bund to go as far as 140.70 which was a key resistance level and the upper end of a six-month trend channel.
"We wouldn't be surprised to see the downtrend in (peripheral) yields having broadly run its course. It's difficult to see the additional tailwind for those markets," he said. But he said it was too early to call a reversal in peripheral bonds.
Ten-year Italian government bond yields rose 4 basis points to 4.96 percent, while two-year Italian yields were up 8.5 bps on the day at 1.91 percent, as investors took profit on the recent rally in debt prices.
Ten-year Spanish yields rose 6.1 bps to 4.97 percent, while two-year yields gained 8 bps to 2.39 percent.
"The Spanish (PMI) was shocking, it came in way below, the Italian one was quite weak and the French one was quite weak as well," said a second trader. "That's not helping and given the performance of the periphery last week it's probably not that surprising it gives back a little bit."
GREEK WATCH
A window of opportunity for investors to volunteer for a Greek bond restructuring closes on Thursday, and analysts said nerves were setting before that deadline.
Greece needs to cut its debt by 100 billion euros in order to meet the conditions of its bailout. If it fails to get enough support for a voluntary debt swap, it can use legislation to force bondholders into taking writedowns, providing it has the support of two-thirds of investors.
If it uses the legislation, it is likely to trigger a payout of credit default swaps.
The maximum payout of $3.25 billion that could result from the CDS trigger, according to data from the Depository Trust & Clearing Corporation, is seen by analysts as too small to have a significant impact on financial markets.
But uncertainty surrounding banks' exposures to CDS as well as the symbolism of the first default in the euro zone could trigger a knee-jerk safe-haven bid for the Bund future, analysts said.
"The amount is pretty low, it's not an amount that can create a crisis (but) it's symbolic, it creates a precedent for other countries to go down the road," Achilleas Georgolopoulos, strategist at Lloyds Bank said.
In particular, Portuguese bonds could suffer, as investors bet that they could be next in line to require a restructuring.
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